Chair Jerome Powell said nearly all Committee participants expect additional rate hikes will be needed by the end of the year, but “considering how far and how fast we have moved, we judged it prudent to hold the target range steady to allow the Committee to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

Borrowing Activity Increases

Matt Dzbanek, Senior Director for Ariel Property Advisors said, “This month’s pause is welcome because as the declining CPI indicates, previous rate hikes are just now working their way through the economy, about a year after the Fed began seriously ramping up interest rates.”

More borrowers are considering their options in this higher rate environment, which has led to a 67% spike in Ariel’s screenings from April to May for both acquisitions and refinancings, Dzbanek said. Since Signature Bank shut its doors in March, the Capital Services team has continued to close deals and sign term sheets.

“We’re still seeing lenders putting out money,” Dzbanek said. “Underwriting standards have been getting tighter but the spigot hasn’t been turned off.”

Financing for the Sea Park affordable housing portfolio in Coney Island, Brooklyn, a $150 million sale that was arranged by Ariel Property Advisors, is an indication of this positive trend with Deutsche Bank loaning the buyers of Sea Park $120 million, or 80% LTV, for the acquisition.

Lending Environment Today

Banks are looking at deals on a case by case basis, taking into consideration the asset class, location, sponsorship and their relationship with the borrower, Dzbanek said.

“What we’re seeing for most assets isn’t a property value issue, but a cash flow issue triggered by higher interest rates,” Dzbanek said. “Transactions are happening but taking longer with lenders asking borrowers more questions, demanding more documentation up front, requesting significant deposits and requiring additional cash in. Owners unwilling or unable to inject more funds into a property they are refinancing may have to opt to sell.”

In addition, personal guarantees have become more common for cash-flowing assets including multifamily properties.

What to Expect

“We cannot predict what will happen down the road, but our hope is that there won’t be additional drastic rate hikes from the Fed, as we believe the real estate investment market is ready for some stability,” Dzbanek said.

The rate hikes chilled investment sales activity in the second half of 2022, which was evident in the slowdown in closings in the first quarter. Sales for all assets were light in Q1 2023, with dollar volume falling 52% year-over-year to $5.3 billion and transactions dropping by 36% to 481 during the same period.

Dzbanek believes sales may rebound in the second half of this year because owners today are more motivated to sell. “Buyers are seeking to acquire select commercial real estate assets at a historically low basis, so if investors see a good deal, they should pursue it,” he said.